China’s handling of the coronavirus has impacted the global economy and fuelled anti-Chinese campaigns. There is anger in world capitals and nations dependent on made-in-China goods and raw materials are rethinking trade ties with the country.
While India is trying to gradually shift its attention from flattening the coronavirus curve to rebuilding the economy, this crisis also presents a new opportunity for the country to expand its manufacturing base, and play a significant role in revamped global supply chains.
It should move strategically to attract FDIs in manufacturing and supply chain that the coronavirus pandemic has accelerated.
Pushing for FDI
In the last week of April, Prime Minister Modi called for a cabinet meeting to develop a strategy to attract FDI, especially for those firms wanting to move out of China. The government is also in the process of identifying and developing 4.6 lakh hectares of land, including 1.1 lakh hectares of existing land in industrial areas, claim reports.
It is also upping its game for fiscal incentives such as preferential tax rates and tax holidays in order to attract foreign firms.
The government has identified 10 sectors – electrical, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing, chemicals and textiles as focus areas for promoting manufacturing. Embassies abroad have been asked to identify companies scouting for options.
Invest India, the investment promotion arm of GoI, has received thousands of enquiries primarily from Japan, US, South Korea and China. Currently, more than 1000 companies are in talks with the government to establish their production base in India.
Casa Everz Gmbh, the owner of Germany-based healthy footwear brand Von Wellx, for instance, will be shifting its entire shoe production of over three million pairs annually in China to India with an initial investment of Rs 110 crore.
India is the world’s fifth largest economy boasting an abundant labour force, as well as the best alternative in terms of depth and size of the markets. The median age in India is 27 years, and it has a working age population of about 900 million. China utilised its labour force in manufacturing by attracting FDI – India must follow the same approach, especially when foreign firms are looking for an alternative.
While post-liberalisation and globalisation, India has opened up sectors to foreign investors, by gradually hiking FDI equity, the current government has taken several steps last few years to attract foreign investors. The steps include 24*7 online services, response-query mechanism, proactive intervention with all the state governments, as well as follow ups with all the GoI departments.
There has also been a reduction in documents for exports-imports from 11 to three, the Insolvency and Bankruptcy Code, and the creation of country specific (such as Japan and Korea) desks among others.
These steps have led India to move up the ladder in the World Bank’s Ease of Doing Business report and also in the world competitive index in the last three years. Today, India is ranked by multiple international bodies as one of the most favoured designations for FDI.
The current low number of covid cases is another plus point in India’s favour.
In mid-2019, 200 American corporations had approached the GoI to move their manufacturing bases from China to India and this number is likely to increase post-Covid.
Reports suggest that around 100 US firms may shift base to Uttar Pradesh from China, some of the most prominent names being Mastercard, UPS and Boston Scientific. Uttar Pradesh is home to over 90 lakh MSMEs and abundant skilled labour, making it a perfect candidate for foreign companies to set up their base.
Apple aims to produce up to USD 40 billion worth of smartphones in India and move almost a fifth of its production capacity from China. This is due to India’s new-production-linked incentives scheme (PLI), which offers a 4-6% incentive for local production.
Lava, too, plans to shift its production and design centre for the export market from China to India within six months. India incidentally exported 3.6 crore phone units in FY 2019-20.
India can score in agricultural produce and pharma as well. The government recently announced a range of measures for the agriculture sector to build cold chains and post-harvest management infrastructure.
India also plans to balance its over dependence on China for 70% of its bulk drugs needs. It is promoting bulk drug parks of Rs 3,000 crore for the next five years, along with the PLI scheme to boost domestic manufacturing of critical key starting materials (KSMs), drug intermediates and APIs.
Opening up sectors to FDI is a good move, but that is not enough. The country needs to create a favourable business environment that allows foreign companies to manufacture in India with a competitive edge. It needs to step up its efforts when it comes to significant labour and land reforms, allowing businesses to hire and fire, hand holding investors, direct tax benefit in SEZs and plug-and-play facilities.
A study by Japanese financial group Nomura found that between April 2018 and August 2019, 56 companies relocated supply chain and manufacturing out of China. Of these, 26 went to Vietnam, 11 chose Taiwan, eight settled in Thailand and only three came to India.
According to an OECD index on FDI restrictiveness covering 68 countries, India possesses the eighth most restrictive FDI regime. As a Economic Times report pointed out, a Property Rights Alliance trade barrier index calculated for 86 countries ranks India as having the most restrictive trade regime bar none.
Work to be done
The government should augment the work on infrastructure, logistics and trade facilitation so that trade and transaction costs, crucial for FDI firms, are reduced. The need of the hour is also to redesign and revamp SEZs and EPZs policy for better performance.
Unlike India, Vietnam, Taiwan and Thailand have a single point of contact, a person who takes care of everything from the government side. They also spend more on infrastructure and offer low income tax rate or corporate income tax exemptions to enhance the attractiveness of the investment environment.
Though the reforms are progressive at the central government and higher bureaucracy level, things are different at the level of state governments and lower bureaucracy — which actually matters when it comes to the implementation of projects and economic activities. It is time to train and bring about reforms at the lower bureaucracy level, which is not ready to give up their power.